I understand that - for many brokers - an option that runs out is automatically exercised when it is 'in the money' on the end of its last day.
My question is at what exact time is the decision made? (based on which closing price?)
Current example: today, 2020-09-11, I have shorted puts for LUV with a strike of 39 that end today. At market close, which is 16:00 (4pm), they are in the money (LUV closed at 38.95). In after-hours trading, LUV went back over the strike price (and that might change again, as the day is not yet over, ignore that). Let's assume it closes at 20:00 (8 pm) at 39.05.
There are very different outcomes depending on the time when the exercising decision is made:
- at 16:00 - that means the option is automatically exercised, and someone out there sells me a truck full of LUV for 39.00. I turn around and sell them on the market for maybe 39.05. He probably is not happy with that (assuming he didn't react in time and stop the execution)
- at 20:00 - that means the option decays worthless.
The question is - do brokers use the 16:00 market close price, or the 20:00 after-market close price for the exercising decision? - and, when will the exercised LUV shares appear in my account, so I can sell them?